Week of DECEMBER 18

Central banks dominated the week, with the Fed, ECB and BOE all leaving rates unchanged and providing an outlook for the coming months. In the coming week, the BOJ will have its last rate decision of the year, the RBA will release minutes, and the US, UK and Japan will update on the inflation situation.

The Week in Review

Following the barrage of rate decisions, central banks have provided mixed messaging. 

The Fed's tone was seen as more dovish as it held rates unchanged and implied three rate cuts next year. DXY lost over 2% at some point, retesting 102, with the next support seen at 101.35. The Fed's pivot away from tightening gave the markets a substantial push towards risk-on just as the Santa Claus rally is set to begin. Meanwhile, the Fed's GDPNow forecaster/tracker upgraded its Q4 expectation to annualized growth of 2.6% from 1.2%. 

Conversely, the BOE was seen as more hawkish than expected, with three dissenting votes in favour of raising rates and Governor Andrew Bailey refusing to say that rates had peaked. Cable was seen trading shy of $1.28, opening the door to $1.30 after the late-summer flop.

The ECB's decision to keep rates unchanged and insist that future rate policy is data-dependent fell broadly within expectations. But the announcement that it would start rolling off some of the securities bought during the pandemic beginning in the middle of the year was unexpected, giving the euro a boost. Coupled with a weaker greenback, the pair retested $1.10 after gaining nearly 2.5%.

The yen experienced weakness on reports that BOJ officials were not ready to move off of ultra-loose monetary policy, followed by disappointment in flash December PMIs for the country. Prime Minister Fumio Kishida reshuffled his cabinet amid a political funding scandal as widespread approval of the cabinet fell to new lows. 

The economy in New Zealand unexpectedly contracted in the third quarter, driven by a drop in exports. But investors shrugged the data print off as the dollar plunged. Kiwi hit a July high of 0.6250 on its way up.

Biggest Market Movers

US markets jumped following the Fed rate decision, with the DJIA reaching a new record high.

USDJPY reversed early week gains and fell below the 142 handle following the Fed rate decision.

The months-long decline in crude prices took a breather following a larger-than-expected inventory build and a weaker dollar, recapturing $70 a barrel.

Gold saw volatility through the week, closing below $2000 on Tuesday but rebounding over $70 an ounce at some point, thanks to a drop in yields.

Top Events in the Week Ahead

Market activity is expected to wind down through the course of the final full week of trading before the start of the year-end holidays. But a few major events on the calendar could shake things up before breaking out the eggnog, with one key event on the week's last trading day. 

BOJ in Focus After Hawkish Rumours

On the central bank calendar is the BOJ's interest rate decision on Tuesday, where policy is expected to be kept unchanged but with keen attention to any hints about tightening in the new year. If the BOJ points to an earlier exit from its ultra-loose policy, USDJPY may reach 140 and even break it, depending on how the dollar continues amid a dovish Fed. On the flip side, 144 remains a strong resistance.

Glimpse on Fresh US Inflation Data

On Friday, the US will release its core PCE price index, an indicator closely followed by the Fed for rate-setting purposes, which is expected to remain unchanged at 0.2% monthly growth. At the same time, Personal income and spending data for November is released, which is also largely expected to remain unchanged compared to the prior month. On the other hand, durable goods are expected to jump back into positive territory at 1.8% after the 5.4% decline in October due to the rescheduling of orders for aircraft. Core durable goods are expected to accelerate from flat to 0.2%.

Global Inflation Rates Seen Falling

Besides the US PCE, a few other countries are updating their inflation figures, although given the recent central bank meetings, the effect on the markets might be a bit reduced as it will be up to two months before there is another monetary policy meeting in some cases. 

Canada's headline inflation is expected to tick up to 3.2% from 3.1% prior, but the core rate is expected to tick down to 2.6% from 2.7% prior, likely keeping projections around the BOC intact. USDCAD bears took over control of 1.34, heading towards 1.33 next, but leaving behind 1.3437 is still in question.

The UK is expected to report that inflation fell to 4.0% from 4.6% prior, but the core rate is still more sticky at 5.4% compared to 5.7% in the previous reading. This figure could get more attention given the BOE's recent emphasis on inflation. However, there will be another batch of price figures before the BOE meets next, on February 1. 

Japan will report its latest CPI data after the BOJ meeting, with the headline figure expected to decrease dramatically to 2.6% from 3.3% prior. The core rate is also expected to decline, but not as fast as 2.5% from 2.9% prior.

The Euro Area is expected to confirm that inflation fell to 2.4% in November.

Other Events and Earnings

Monday is the German Ifo Business Climate survey. Tuesday sees US building permits. Japan's trade balance and German GfK consumer confidence are expected on Wednesday. For Thursday, the US final Q3 GDP reading is on the docket. And Friday includes UK retail sales and the University of Michigan consumer sentiment Index. 

Earnings expected in the coming week include Accenture, FedEx, Micron, General Mills, Nike, and CarMax.